Hewlett-Packard's stock plunges on Autonomy revelations

By Steve Johnson sjohnson@mercurynews.com

Posted:
11/20/2012 11:11:34 AM PST

Updated:
11/20/2012 06:22:43 PM PST

PALO ALTO -- Revealing yet another staggering corporate foul-up that sent its stock price into a tailspin, Hewlett-Packard (HPQ) said Tuesday it had failed to detect "outright misrepresentations" about the value of Autonomy before paying about $11 billion for the software firm last year.

Coming on the heels of the company's other recent missteps, the disclosure has raised deep concerns about the quality of leadership at the Palo Alto technology giant and fears it may have become so dysfunctional its future is in serious doubt. Alarmed by the latest news, some Wall Street analysts immediately downgraded HP's stock, which sank to its lowest point in a decade at the close of trading.

"This story has been an unmitigated train wreck," Brian Marshall of the ISI Group concluded in a note to his clients. He advised investors against buying HP's shares "as negative information continues to pour out" of the company, adding that "the end is not in sight."

HP made the disclosure while reporting it lost nearly $7 billion in the fourth quarter and $12.7 billion for the fiscal year. Its quarterly sales of $30 billion were down 7 percent from the same period a year ago and its $120 billion in fiscal-year sales were off 5 percent from the previous year.

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Much of the red ink was due to an $8.8 billion write-down related to its purchase of United Kingdom-based Autonomy. More than $5 billion of that amount was due to "serious accounting improprieties, misrepresentation and disclosure failures" by Autonomy's former managers, HP said, with the rest stemming from recent declines in HP's stock price. It was the second consecutive quarter involving a multibillion-dollar write-down related to a company HP bought.

Meg Whitman, who took over as HP's CEO in September 2011, said during a conference call that HP discovered the problems only after it bought Autonomy, whose software helps customers sort through massive amounts of data. She said a former Autonomy executive revealed details of the misrepresented finances.

"We are extremely disappointed with the news," Whitman said. "There appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers."

HP said many of the misrepresentations involved sales of Autonomy's low-end hardware products and transactions "where no end-user customer existed at the time of the sale."

HP issued a statement saying the matter has been referred to the U.S. Securities and Exchange Commission and U.K. regulators "for civil and criminal investigation," and the company "is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders."

But the case already is turning into a finger-pointing dispute.

HP didn't accuse anyone by name, but regulators most likely will want to talk with Autonomy's founder and former CEO, Mike Lynch. He had remained with Autonomy after HP bought the business, though Whitman noted earlier this year, "I let Mike go" because the business was performing poorly.

However, in an interview with The Wall Street Journal, Lynch called HP's claims about Autonomy "utterly wrong," and accused HP of mismanaging Autonomy so badly "now they are trying to cover it up with this big write-off."

Another potentially contentious issue could center on some of the outside firms that were involved in the Autonomy deal. HP General Counsel John Schultz said Autonomy had been audited by the consulting firm Deloitte, which raised no red flags. And while HP had hired KPMG to advise it about the purchase, it had to rely on Deloitte's audits and also had reported no irregularities.

Nonetheless, back in 2011 the software company's purchase had been immediately controversial, with investors questioning the price of about $11 billion. Oracle (ORCL), of Redwood City, said at the time it had valued Autonomy at less than $6 billion. The purchase was made under the tenure of former CEO Léo Apotheker, who told The Wall Street Journal he was "stunned and disappointed" by Tuesday's revelations.

It was the latest in a series of blunders by the storied technology company.

Just last quarter it reported an $8.9 billion loss after writing down $8 billion in connection with its $13.9 billion purchase of Electronic Data Systems in 2008, one of several questionable purchases HP has made. Another big problem for HP has been the slowing sales of personal computers -- its primary business -- which largely contributed to its recent decision to lay off 29,000 workers over the next couple of years.

In addition, HP's executive ranks have been in turmoil, with Whitman the fourth CEO since 2005.

Some industry observers said HP has a good chance to weather this latest fiasco and praised Whitman for her efforts to turn around the troubled company by cutting expenses, reorganizing divisions and identifying markets where it potentially can boost its sales.

"Given what she inherited, she's done a reasonable job of getting HP pointed in the right direction," said Neil McDonald, a fellow with the Gartner research firm.

"Overall," added Charles King, president and principal analyst of Hayward-based Pundit, "we don't think it's time to head for the lifeboats quite yet."

But by the time the market closed after the Autonomy disclosure, HP's stock price had fallen $1.59 to $11.71. The last time its shares were lower was in September 2002. And other analysts issued dire warnings about the company in notes to their clients.

"Every peel of the onion seems to reveal more spoilage," said Discern analyst Cindy Shaw.

Contact Steve Johnson at 408-920-5043. Follow him at Twitter.com/steveatmercnews.